As a business grows, budgeting becomes necessary to sustain its growth and expansion. Budgeting methods can help you track your company’s finances and make informed decisions that will help you meet your company’s financial goals. This article will cover the four main types of business budgeting methods and how to stay on budget no matter which method you choose.

1. Incremental Budgeting

The incremental budgeting method is where companies use their previous year’s financial numbers and add or subtract a percentage to get the current year’s budget. It is the most common budgeting method companies use because it’s simple and easy to understand. It’s a great method if your company’s costs are similar year over year and any changes are easier to spot.

2. Activity-Based Budgeting

This top-down type of budgeting focuses on the key outcomes a business would like to achieve in the next period. It involves tracking and recording all costs the business anticipates and then creating a budget to spend the funds. For example, if the budget allocates money to a specific department, the department must determine how best to spend the same amount.

3. Zero-Based Budgeting

It’s a common budgeting method that begins with the assumption that the company’s budget is zero and must begin from scratch with no reference to the previous year. Zero-based budgeting allows you to allocate your funds to expenses, savings, and debt payments. As such, it’s a very strict method where managers must justify every single expenditure, making it a time-consuming budgeting approach.

This budgeting method is great when your company urgently needs to contain costs, especially during major economic or market downturns. It’s best suited to containing discretionary costs rather than essential ones.

4. Value Proposition Budgeting

It’s also called priority-based budgeting and focuses on the value of every item on the budget. It analyzes the value of each expenditure, and the budget usually has the following questions:

• Does the value of the item outweigh its cost?
• Why is this amount in the budget?
• Does the item create value for the company?
• Why is the company spending this amount?

In other words, this method strives to identify value and highlight opportunities to reduce expenditures that aren’t value drivers for your company.

Tips on How to Stay on Budget

Creating a budget for your business is a great step to managing its finances, but the key to success is staying on the budget. Here are some tips to stay on budget, regardless of your chosen method.

Pay Expenditures on Time

Late fees and other bills can result in additional, unanticipated costs that may disrupt your budget. Business owners can pay their expenses on time by setting up monthly reminders and keeping records of each billing statement. This will help you stay on budget by avoiding extra costs from penalties.

Set Aside Money for Taxes

One of the main ways to stay on budget is by setting aside money for taxes. Keep your tax funds in a separate account and avoid mixing them with other funds. This will help you avoid complicating your finances and stay on budget.

Hire a Professional

As your business grows, managing your budget can become challenging. There are many professionals, from accountants to budget analysts, that can help you manage and stay on budget. Consider hiring a professional to help you keep track of expenses and manage the budget.

Monitor the Budget

Monitoring the budget involves tracking every business expense and evaluating the numbers. This will help you avoid financial complications such as overspending on certain items.

Budgeting is essential for all businesses. It allows you to manage your company’s expenses by tracking them and ensuring its finances are good. Each budgeting method listed in the article has its benefits. When deciding on any budgeting method, consider your company’s financial goals and choose one that aligns with them.